JP Associates Crashes 33% in 4 Days, Loses Rs 3,300 Crore M-Cap

Shares in Jaiprakash Associates crashed to double-digit losses for a second straight session on Friday. Shares in the engineering and construction firm fell as much as 14 per cent on top of the 17.6 per cent plunge yesterday. Over the last four sessions, Jaiprakash Associates has fallen 33 per cent and lost over Rs 3,300 crore in market capitalisation.

Reasons for the selloff:

1) Promoters have sold shares in open market: Amid speculation that promoters are reducing their stakes, Jaiprakash Associates yesterday clarified that one of its promoters (Jaypee Infra Ventures) sold 3.53 crore shares between September 1 to September 3. Its stake has now come down from 29.75 per cent to 28.30 per cent. The promoters as of June-2014 had no pledged shares and own 45 per cent stake in Jaiprakash Associates currently. (Read more details)

When promoters sell shares without a valid reason, investors tend to get jittery. In the current scenario, Jaiprakash Associates says the promoter company sold shares to "meet its requirement of funds including for social cause."

Gaurav Dua, head of research at Sharekhan told NDTV, "We would not know why have they sold or what they are planning to do with the money." (Watch the interview)

2) Mr Dua says there are rumours in the market that Jaiprakash Associates, as a Group, has not been able to service its debt.

It's known fact that Jaiprakash Associates is struggling under huge debt. According to Thomson Reuters data, the company has a net debt of Rs 63,111 crore and a debt-to-equity ratio of nearly 6 times. To deleverage, the company has been trying to dispose some of its assets. (Read the full story here)

Companies that operate in capital intensive space such as Jaiprakash Associates tend to have high debt. This also means that such companies have to divert a lot of earnings towards servicing debt.

Mr Dua says 80-90 per cent of enterprise value of Jaiprakash Associates is debt and the current market cap reflects just 14-15 per cent of valuation.

"The assets are there, they are working, very good assets, but it is the sustainability of the Group which is a question mark," he added.

What should you do with the stock?

As a rule, investors should stay out of companies with corporate governance issues, most analysts told NDTV. UR Bhat, MD of Dalton Capital told NDTV that markets react quickly in situations where corporate governance is suspect.

Mr Dua, whose brokerage has a "hold" call on the stock, says Jaiprakash Associates is a story about deleveraging and any possible re-rating of the company depends on its ability to bring down debt.

However, some analysts say investors should make use of the dips to buy Jaiprakash Associates. Independent analyst Sanjeev Bhasin recommends a "buy" on the stock for a three month target of Rs. 57-Rs. 60. Mr Bhasin says the book value of the share is close to Rs. 57. Book value is the total value of the company's assets that shareholders would theoretically receive if a company were liquidated.

Maybank in a note today said there is some cash crunch with JP Associates. However, it added that there is deep value in company. It has a "buy" call on the stock with a target price of Rs. 93 per share.

Shares in the company closed 10.30 per cent lower at Rs 33.80 on the BSE today. The stock underperformed the broader Sensex, which closed down 0.22 per cent at 27,026.70.